How To Easily Calculate a Mortgage You Can Afford
A home purchase is one of the biggest investments of a lifetime, so of course you want to be wise and make sure you stay within the boundaries of your budget. So exactly how do you calculate a mortgage you can afford? It's easy! Follow these steps and you're well on your way.
1. Know what you can afford.
The first order of business is to review your budget and see what you can afford. Don't have a budget? Then that's your first step. The last thing you want is to commit to making a large monthly payment that you can't afford. It will be the biggest chunk of money that leaves your bank account every month, so be realistic about what you're willing and able to spend.
Next, review your credit score. Check it for accuracy and correct any errors or misinformation. Your mortgage lender will be reviewing this too, so it's good to stay abreast of what it looks like and make sure everything is in order. Take this time to look at your FICO score also. Both are viable indicators as to the health of your credit and your overall financial responsibility. It also can affect the interest rate you qualify for on a loan.
Finally, pay down or pay off unnecessary debt. If you have superfluous debt that you can pay down or pay off before signing off on a mortgage loan, it's wise to do it if you can afford to. Less payments to worry about each month allows your money to go to those things that are highest priority on your budgetary spending.
2. Know the price of the home.Now it's time to get to the number crunching. Look at some houses in your price range that have the desirable qualities you're looking for in a home in the neighborhoods that you're most interested in. Get familiar with the ballpark dollar amount you'll expect to pay for a home that meets your requirements. Try some in the low, middle and upper ranges of your budget.
3. Know the down payment.The down payment is the money you pay to the seller of the home. Putting at least 20% down typically allows you to avoid having to pay Mortgage Insurance, so keep that in mind. See how differing downpayment amounts affect the monthly cost of your potential home and see what best fits your financial parameters.
4. Know the mortgage term.The mortgage term is the length of time you have to pay back the loan. 30-year and 15-year fixed rate loans are most common, but they're not the only options available to you.
5. Know the interest rate.
The interest rate is the cost of borrowing money or the rate charged by a lender. You'll need to know this to factor it in to your monthly mortgage payment. It's best to find and compare home loan rates and read up on the latest mortgage rate analyses so that you're informed on all of your options and which is optimal for you.
6. Ready, set, calculate!
You can use an online mortgage calculator or do it yourself. We like BankRate.com's Mortgage Calculator and NerdWallet's Mortgage Calculator, but there are plenty of options out there. Both of the recommended sites allow you to easily adjust the numbers and explore what works within your housing budget. NerdWallet also helps you factor in Property Taxes, Homeowner's Insurance and Homeowner's Association Fees common to your area of interest so you know many of the other expenses that you'll have to budget for (beyond the principal and interest) in your home buying experience.
Find the tool or method that works best for you and start crunching the numbers.
What's your best tip for calculating a mortgage you can afford?